security protocols are put together for that. we feel confident that we can take them to texas and receive as arm a reception as we did in new jersey and san francisco and making sure the event is as safe as possible and also that it is not used taz a cove for illicit activity such as human trafficking. i would appreciate the chance if i could to come back to you about that. but to note that the human trafficking task forces begin to focus on these events months before they come to fruition and specific plans are set in place and specific operational plans are set in place. >> thank you. i also want to add my changes to the chairman for helping us fund and put into law the establishment of the human trafficking survivors advisory which is going to be very helpful and also look forward to hanging out with the chairman when that event comes around. i'm sure it will be a lot of

fun. i didn't watch the super bowl. i was at the command center watching the other stuff. the next sprnl i'm going to coover to houston. >> we'll be glad to have you. >> thank you. >> thank you very much. mr. jolly? >> thank you, mr. chairman. ms. lynch, three very specific questions and if any of them need to be taken before if record, that's fan. the bureau staff request is down $200 million and there's also, i think, plans to hire a little over 300 positions. we've heard concerns from some of the prison local some of the employees about the use of augmentation and what that means for frankly their own security but also their own operational abilities. can you provide some perspective on the decrease in the funding request, what it means in additional hiring and the process for using augmentation? >> with respect to the bureau of prisons, the funding as i

discussed with another one of your colleagues, i think maybe mr. rogers, the budget numbers are certainly lower than the request for last year. because again we did receive the $444 million for construction funds that we did not to ask for again this year. that would not have been an appropriate request. the amount may be lower but those funds are being used to relieve overcrowding. the operations are not being cut. you know, our overall numbers are going to be requesting not only additional new positions but additional funding to support those new positions. a lot of the new positions will be in the correctional area, but they will also be in the mental health area. this is a problem that is cutting there all of our prisons and a problem that i hear from the state and local colleagues as well, dealing with individuals who present seize issues raises safety concerns for the inmates and the officers, as well as operational concerns. >> the reliance on augmentation, though. to what extent are you relying

on that compared to even more than the 336 positions that may be hired? >> can you give me some context? i'm not sure what you're referring to. >> in terms of reie signing duties of individuals to support those of, say, full-time security officers at facilities. we hear from several prison locals about the concern of using employees that perhaps are not as trained or at least well-trained in certain specific tasks within the prison system, that they're being asked to fill in for those duties and it's raised concerns of security for some of the prison locals. >> with respect to that specific, i don't have information at this time. but i'm happy if we could have our staffs talk and you get some perspective on this so we can provide you information on it. i will say i've had the opportunity to meet with the heads of the correctional officers unions for the bureau of prisons and am happy to work with them on a number of

recommendations within the prison. their concerns are important to me because they impact safety throughout the institution. >> the next one is federal prison industries, the program that allows inmates to work in production for a return for a stipend. is there dascapacity? what's the state of play for federal prison industries? >> well thank you for the chance to talk about federal prison industries. it's actually one of, i think, one of the ways in which we cannot only provide our inmates with job training and job skills but also help their reentry platform out back into the community. we've had some situations where the employees have connected with the federal prison industries has find that they received not only well-trained individuals but incredibly loyal

people who appreciate being given a chance to use their skills and become productive members of society. we're soupt tupportive of that. federal prison industries provides a wide array of services. frankly the department of defense is a huge purchaser of federal industry products. have been pleased with their products as well. it's no longer mandatory that the federal agencies use them but we're encouraging or federal agencies to use them and active actively partnering with others. we're very pleased to note that we've recently brought a new ceo on board who comes with 20 years of experience in private industry and he's excited about the prospects of rebuilding this great pam. tremendously looking forward to work with him as well.

>> i'm about out of time pi yeesh yat that and look forward to working with your department. we provided language in last year's bill record digital rights management, secure content management. there have been incidents including last year where the identity of fbi agents and dhs personnel was released. if you could provide some perspective on where the department is with secure content management, plans going forward in your budget or unmet needs. >> with respect to that issue it's very important to us because you mentioned the release of personal information for anyone, the citizens or someone who is a law enforcement officer carries with it grave risks. certainly with our law enforcement officers, the risks are enhanced and we're involved in pros kubting individuals who have released information at the behest of terrorists organizations. something we take seriously.

certainly with respect to the cyber budget overall, we have a larger number in there, $121 million. but what i would note is that within that we are requesting for $26.4 million to strengthen doj's cybersecurity environment to protect against insider threats and also to bolster literally the physical security of our systems. we're all -- i say we, i now refer to a numb are be f 0 agencies. we're all at the point that we're dealing with the greatest of last century's technology in many ways, well put together and well maintained by dedicated staff. but systems are approaching end of life. systems are changing. the costs of maintaining the systems are growing. so i will tell you that the department of justice is committed to this but looking for ways to make sure that we have the most efficient systems possible is included in this budget request as well. >> do you have flexibility to move quickly on outside vendors?

i also serve on the va committee and this is a huge concern, how much is done in-house and whether there's commercial use on the shelf that can be quickly used in an environment that rapidly changes that creates new vulnerabilities every day. is there a balance between in-house and relying on solutions, technology solutions that are out there right now today in corporate america. >> we're allowed to use a variety of vendors if they meet the needs. the process is lengthy but it's there as you know. the va is an excellent example of all of the issues that we're discussing here. i look forward to working with you to see that the department of justice can be in the stream of improving our technological capacity. and whether or not congressman we can use off the shelf

products depends on the type of system that we're talking about. i will say that. certainly when it comes to case management, for example, managing data for the lawyers who are litigating our cases, there are several, several excellent programs that we're able to incorporate into the department of justice systems. when it comes to managing secure data there are not. not to say there are none but there are fewer options. so a lot of that will depend on the type of system that we're talking about as to our ability to use outside vendors. >> thank you, mr. chairman. >> i want to recognize at this time our ranking member, the gentle lady from new york. >> thank you, mr. chairman. i'd like to join my colleagues is welcoming our attorney general here with us today. i apologize but the secretary of state was next door. so we're moving quite efficiently and i open effect e

effectively. i have a request regarding the atf funding proposed in the president's budget. the budget request includes funding for additional atf agents to help investigate gun crimes and to ensure that the firearms are not inadvertently sold to persons who are not legally permitted to acquire one. the ballistics information network to help law enforcement solve firearm crimes. many members of congress express opposition to new gun restrictions by saying we need to do a better job enforcing the gun laws that are already on the books. isn't it fair to say that the budget initiatives that you are requesting for fiscal 2017 are designed to do exactly what so many in congress say they want

to do, and that is to enforce the gun laws already on the books by helping state, federal and local law enforcement prevent gun crime and prosecute those who violate the firearm laws? >> yes, indeed. certainly as the department of justice was looking at the recommendations to make to the president most recently, our mandate was exactly that. to view existing firearms law and determine how we can marshal and leverage department resources to better protect the american people within that framework of laws. so as you've noted we've taken steps and we have some questions for atf funding that would increase positions wells increase funding. we would -- this funding would allow us to bring on board 200 additional personnel, 80 of whom would be agent, 120 would be

industry investigators to support our new review on those who are engaged in the business of dealing in firearms. the special agents would be working on violent crime issues, trafficking cases and the like. they would enhance our efforts in reducing violent crime across the country again using the existing laws. certainly the network has been of great use to law enforcement over the years. the sharing of information at the federal, state and local level about ballistics being used in crime have been extremely successful. and the other initiatives that we propose would also enhance our ability to detect when guns are lost or stolen in france mitt much earlier. those guns tend to be used in crimes. we've seen that. so having the ability to start those investigations earlier would enhance public safety. so that indeed the

recommendations that we made are design to tackle these difficult issues of both violent crime and also keeping guns out of the hands of those who are not authorized by law to have them. but at the same time strengthening the background checks system to so that the licensed dealers who rely on that system have the best system that they need. so that individuals who are relying on thatsome as they go through a routine firearm purchase transaction will have the best and most efficient system as well to rely on as they go about their business. >> i appreciate you mentioning the nix system. i want to follow up on that. we know that current law prohibits people from gieing a gun if they're a danger to themselves or others or unable to manage their own affairs. the social security

administration has indicated it will begin the rule making process to ensure that the criminal background system, the system receives all of the information on the tens of thousands of persons who are found each year to have a documented mental health issue, receive disability benefits and are unable to manage those benefits because of mental impairment. if you could just give us an update on that effort, including the justice department's efforts to assist the social security administration in helping to ensure that persons with mental impairments do not have access to firearms. >> thank you for raising that important issue as well. certainly the law do prohibit individuals with certain types of mental illnesses from being able to purchase firearms. and they are very specific delineations of the ajudd occasions that are required to

meet that. also every federal agency is required to provide information into the system that would assist the system. the social security administration is engage in the rule making so that they can in fact produce a clear legally consistent definition of which types of individuals and which types of adjudications would be required to be turned over to the system. and the department's rule is to pr vied legal assistance and clarity as a social security administration goes through that process. they will essentially craft a rule, it will go out for public comment, those comments are received back and the agency, the relevant agency in this case, ssa, would provide a response for any rule would be promulgated. but it is designed to make sure that the individuals who fall in that category are those that are

clearly connected to the legal prohibition against being able to legally obtain or buy a firearm. >> thank you very much. >> thank you. judge carter. >> thank you, mr. chairman. you know, i think you can figure out that i'm the chairman of homeland security appropriations committee by the comments of the chairman. dhs has been doing all we can to catch and investigate criminals, illegal aliens and smugglers who are pouring across our southern border. you must do your part with the prosecutions and consequences. the past two years you've requested and received increased funding are immigration judges. mind you these are courts used 99% of the time by foreigners who are seeking an immigration

benefit yet still we fund them through taxpayer dollars. why are we not placing the immigration judges on the border where the rubber actually hits the road. why do our wait times increase even though we're increasing the number of immigration courts. and why does that staff report sitting in immigration hearings only to see case after case ad minute stray tiffly closed allowing thousands to circumvent immigration enforcement. would you like to answer those question? >> thank you for raising this important issue. as you note, managing the immigration caseload is one that's increasingly challenging for all of us, those at the border, those of us who are involved in procuting the cases arising from that and the department of homeland security as well, as they deal with deportation and managing all of the issues that flow from that. i thank you again for your commitment to that issue as well. certainly with respect to our

immigration judges, as you indicate, we have receive increases over the last two years for the hiring of immigration judges. let me thank this committee for recognizing the need for hiring more immigration judges and express the department's appreciation for your support with that. certainly with respect to the total office of immigration reform, we are in fact requesting additional funding but no new judges this year because we have brought judges on board. we're in the process of hiring more, using the funds that were provided to us. and the additional funding that we're requesting is to make sure that the judges are up and running. as you indicated, there are often long waits, crowded courtrooms. so we're using the additional funding requests -- or the additional funding requests would be used to support the infrastructure for the judges. we want to be responsible with our request and fully integrate the judges and continue the

hiring under the money we already received. with respect to immigration judges on the border, we've tried to be flexible with regard to that. certainly within the last year or so, it may have predated a bit my name as attorney general, as i'm sure you'll recall, we have waves of individuals coming across the border at different times. and the composition of the groups will change. so, for example, when we had large numbers of unaccompanied children, very young people coming across the border. in fact what the department of justice did was temporarily reassign some immigration judge to the border areas to handle just the influx of cases there. we look forward to being responsible in that bay so can we can deploy the judges to those areas where their colleagues are overwhelmed. we have an additional hiring plan as i mentioned with the money that was already appropriated.

we feel we can be flexible and we look forward to continuing to be flexible. if there were to be a crisis in another portion of the country, not the border or maybe the northwest border, for example, or the northern border, we would again use that flexibility to make sure that we could staff up those judicial offices so that their colleagues would not be overwhelmed. that's how we would intend to deal with that. but we're requesting additional funding to bring on board the judges and we appreciate this committee's support of the office of the immigration reform. >> within the last four months we've had a sudden dropoff this month. but within the last four months our numbers on the uac unaccompanied children have gone right back up to 25 or 30,000. it's really unusual at the time of the year. those of us who have lived in texas and know what goes on at the border because we've id

lived with it all of our lives. it gets cold, people don't come across the river. when its gets warm, people come across the river. it's pretty simple. it's cold, to get wet. the situation is that is contrary to that we could expect. that means there's something driving people up here. if we can't get them before an immigration judge, give them a notice to appear, they are then picked up by another federal agency and transported to god knows where in the united states. could be maine, washington state or the tip of florida. notice to appear. chances are -- most of the children that we're calling children are 14 to 17 years old. that's the highest number of category coming up as unaccompanied quote children. by the time they reach here, good chance they'll be adults.

we got to fix that. i know you're trying. you ask for more money for judges, i personally will give it to you because i truly believe the solution is bringing them before a court of jurisdiction and having a real hearing, not an agency and a bur ro krcat. thank you for what you're doing. i personally will be on your side. >> thank you, judge. i recognize the gentlemen from new york. >> thank you for being here and congratulations on being our attorney general. you know when i first came from puerto rico as a young boy and i started paying attention to what was being discussed at my house, it was the beginning of the civil rights movement and it was where the puerto ricans could vote and both movements has something in common, voting rights.

in our case if it was whether we took a test in english or spanish, settled by the courts. lately many of us have felt that we're making it harder for people to vote. not easier to vote. it brings me to the question of what happens when the commissioner wrote to states saying you can't ask for citizenship. that's always troubled me because, you know, in my case and the case of so many other people, we don't talk around with proof that we're citizens. that's just the way it is. in fact this voting card is probably -- my congressional voting card probably the only proof i have on me that i'm a citizen. because we would assume that all members of congress are citizens of this great land. that's it. my question to you is what role is the justice department playing on that particular issue with that commissioner from the

elections commission? do you feel that he had a right, without giving me a judgment if that's what the case would be, to write that letter. and lastly, what in general are we doing to protect people's right to vote. it seems to me that at this time in the history of our country to have fight the voting rights issue all over again is a sad state of affairs. >> well, congressman with respect to the specific case you raised, it's currently in litigation. typically it is the department's responsibility to represent federal agencies. we do advise a all of our client agencies on the applicable laws and issues that are raised by their actions. and with respect to this case it's currently in litigation. i'm unable to give you specifics on that. there's a judge holding a hearing soon to review whether or not there's a legal basis for certain actions. i'll leave that matter there. with respect to voting rights in

general, it is in fact one of the department's priorities to mike sure that we fully enforce all of the relevant and applicable laws that protect the rights of everyone to vote. certainly there have been changes in those laws recently with the voting rights act itself. preclearance is no longer an option or a tool that we have. that has not diminished the department's control when issues are brought to us where we don't have preclearance eyes on something where there's evidence of irregularity or issues arising later in the process of starting investigations and working there. and i would note that this is also an important issue in the field with respect to the u.s. attorney community also. they're very concerned at the local level as to whether or not there would be any regularities with voting and focused on that. we're very committed to protecting the right to vote for all americans in making sure

that it's exercised in as free and open a way as possible. we provide guidance to states. some states come to us and ask questions about changes. we still do that. and we'll consult with them and have had very positive dialogues on specific issues about the best way in cho to ensure an open right to vote. where necessary, we'll lit gate those issues also and we'll let a court decide. but where we feel that the right to vote is being enfringed in a way that is inconsistent with the values of this country kb which is every american gets to participate in great democracy of ours, we'll bring those actions as well. >> in the time i have left, i know you can't comment on something that's being litigated. but are you at liberty to kmebt whether or not that the justice department has asked for a stay

on this whole issue by the elections commission? >> well i think that the pleading are, the pleading have been filed now and i think that the plaintiffs did ask the court for an injunction. i think the matter is under consideration now. >> thank you so much. and thank you were mr. chairman. >> thank you and i appreciate very much your focusing and making sure that every american has the right to vote. and that means eligible. and i deeply appreciate that. and that you'll also defend, as the department always has, fad rale agencies and therefore you'll be defending the federal elections commission. i think that's very important and i appreciate that very much. want to recognize mr. kilmer and then i believe we're going to wrap up. >> thank you, mr. chairman. i'm grateful that the president established the task force on 21st century policing to provide a road map on how to build trust and incorporate best practices to reduce crime and make sure everybody is safe.

and i know that the task force made several recommendations that were specific to the lgbtq community making sure that everyone is safe. i know the department is taking the lead on promoting the adoption of those best practices and recommendations and was hoping you could give an update on how that's coming and what the strategy is for getting these measures adopted nationwide. >> yes. thank you. this is an important area. it is an area in which our most vulnerable population did not think that police protection extended to them or they were unable to seek police protection. frankly when i talk to law enforcement, they don't want anyone feeling that you can't call on an officer for help. and so we've tried to provide guidance, we've tried to provide

training on how to deal with individuals who are in this vulnerable situation, either under attack or under assault. we've tried to provide training in dealing with individuals who present issues of gender identity so that police officers have the training they need to recognize the issues that come from that, ranging from booking to housing for example. and so one of the things that we have done is -- i may have mentioned in an earlier response to a question that we have recently released guidance on sexual assault and domestic violence. this guidance focused on identifying and preventing gender bias and law enforcement's responsibility to gender violence and domestic assault. we've consulted with the state and local law enforcement both with their experience and the questions that they had also. and so that guidance came out in december. and it does identify and recommend practices that will help law enforcement agencies to develop best practices to respond to crimes of violence.

not just what people traditionally views a domestic violence against women or sometimes men but also the lgbtq community also, to recognize those symptoms and to be able to responsibility to those individuals. and the guidance seeks to make sure that we have way to connect law enforcement with a very, very important part of the community when it comes to all types of domestic violence, which is other agencies and resources. often community resources are nongovernmental agencies are ngos that can provide support for victims of domestic and sexual violence. >> thank you for that. with the time i have left, i represent a district that has a large navy base and i think i represent more military veterans than almost anybody in this place and feel very lucky about that. and i just, i fundamentally believe if you serve we should have your back. my state's human rights commission has had, to me, a surprising number of instances where service members or

veterans have voiced concerns around housing or employment discrimination. i know the civil rights division under your jurisdiction deals with those issues and i want to get a sense from you whether it's properly resourced to deal with the needs of service members and veterans in this regard and what sort of demand you're seeing for those services and the ability of the division to immediate that demand. >> well, i will say that i certainly agree with you in the fact that i think we owe our veterans the greatest support when they return home. be it an issue of health or services, or the all important right to vote when they're also stationed overseas. one of the things we do in the sieve rights division is having an active practice making sure that service members based overseas having the information they need to vote and that particular right is not infringed.

we do enforce the federal laws that help them return to their workforce. when they come home from military duty. and also we've seen a number of disturbing cases that involve financial exploitation of our service members, both when they're coming back and trying to seek housing and also while they're on active duty, of service members and their families. we've seen some unfortunate sin accidents where that type of fraud is growing and that's a matter of grave concern to me. we also have issues of course with many of our service members returning injured. some of the injuries are visible and some are not. but it presents them with a disability that gives them special needs in terms of housing and employment. we take very seriously our responsibility to defend their right to those reasonable accommodations as well. the fy 2017 budget include a total of $4.1 million in resources which is going to plus up the service members civil

rights cases by a little over $580,000. we have a service members initiative at the department led by the owner general. and it's been instrument tall in making sure that we at the department look at all of the issues that our shfs members present. and making sure that other areas also. i mentioned the fraud cases grow, the criminal division is cognizant of the issues as well. we're trying to look at all of the issues and be responsive. >> we'd love to follow up on you with that. thank. thank you, mr. chairman. >> thank you, committee members thank you and above all attorney general loretta lynch thank you for your service to the country and your cooperative relationship with this committee is deeply appreciated in ensuring that americans can sleep soundly at night knowing that the department of justice and their local and state law enforcement officers are working

together to protect themselves and their families. thank you very much and the hearing is adjourned >> thank you.

a cabinet secretary will testify before congress today to

talk about the president's 2017 budget request. that starts at 2:15 eastern. we'll have it for you live here on c-span3. donald trump today received his first congressional endorsements. chris collins said in a statement, donald trump has clearly demonstrated has the guts and the fortitude to return or nation's jobs stolen by china, take on our enemies and most importantly reestablish the opportunity for our children and grandchildren to attain the american droem. that's why i'm proud to endorse him as the next president of the united states. also california congressman duncan hunter is backing donald trump. he said, quote et, we don't need a policy wonk as president. we need a leader as president. since the start of this campaign, only one network has taken you on the road to the white house. from the early announcements and

the policy speeches to the candidates visiting diners in iowa and new hampshire and of course the campaign rallies. after the results this weekend in nevada and south carolina, the republican race has now narrowed. the democratic race has sharpened. we're going to stay in south carolina with the big democratic primary this saturday and then we move on to the multistate primaries and caucuses in early and mid march. this race is just getting under way. you can follow all of it here on the c-span networks, online at c-span.org and of course on c-span radio. the nation's governors gathered here in washington over the weekend for their annual winter meeting. the opening session focused on the economy. this is about an hour 20 minutes.

and now, ladies and gentlemen, please be seated and welcome to the podium, the chair of the national governor's association, governor garry herbert of utah. [ applause ] >> well thank you. it's an honor to be with all of you here today. thank you very much. that was a stirring rendition of our national anthem and a great way for us to start off the day as we welcome the governor to the 2016 winter meetings and invite your participation as we work together to help america be on the right track. we appreciate the work of the governors and we have an exciting weekend here ahead of you, for you. as i look around we have some

familiar faces, but we have some new faces. let me just mention a couple of them. we have the opportunity to welcome as a newer -- our newest colleagues here with us today, kentucky governor matt bevin, louisiana gof forjohn bell edwards, north marina islands governor, so let's give them a welcomed hand. we're honored to have you here with us among the governors. [ applause ] i also recognize -- where's pat mccory. right over here. pat is again from north carolina as you know. and he's asked for a point of privilege. we're all big football fans. he's got something to get off of his chest. >> i'm going to make this very quick. governor hickenlooper and i were friends for a long time. he was mayor of denver when i was mayor of shar slot. he's mayor of the great state of

colorado and i'm mayor of the great state of north carolina. we had a super bowl bet and i don't know if it was the referees, the bad climate in california but something did not work out too well for us. not only that but i totaled my car after the game. it wasn't a good evening in california. i want to congratulation governor hickenlooper for the great victory of the broncos over the north carolina panthers. i have to wear his jersey today for another minute because, i mean hickenlooper is not a real good name to have on the back of a football jersey. but we did make a bet where i'm pleased to report that we also want to help the needy. we're delivering, i believe about 50 cases of turkey and ham and butter ball ham to the state of colorado to a homeless

shelter in colorado. and we're also going to deliver -- [ applause ] -- and we're also going to deliver some dog food because the first lady of north carolina is really big into rescue dogs and helping shelters and we make some great dog food in north carolina. we're going to send that to some dog shelters throughout colorado. and those two companies are going to deliver the same amount of food to three north carolina homeless shelter, good food and ham to shelters in charlotte, durham and raleigh in addition to helping some dog shelters with animal food. governor hickenlooper being the got sport that we are in north carolina, i just want to congratulate you on a great super bowl victory. and i am going to proceed to give your jersey back. >> no wait. turn around. there we go. there we go.

[ applause ] >> i just want to make sure everybody gets a chance to see that. [ applause ] [ laughter ] [ applause ] >> we will be back next year. [ laughter ] bipartisan support in the united states of america. [ applause ] >> thank you, governors. >> governor, it was one heck of a football game. i've got to say. and i do believe the panthers will be back. i know the broncos will. >> i know it was a high rating for the television, so it was a great super bowl. and show some of the friendly competition we have amongst the states. and so thank you both. we're honored to have you both here. on a more serious note, i'm looking for governor terry branstad. i don't know if he's arrived here yet, but some of us had the opportunity to go and visit him in iowa as he became the longest

serving governor in american history. 22 years is what he's served so far. and every day he adds to the record. a record that's been held by governor clinton way back in the 1800. so let's just give him a round of applause anyway at his record. [ applause ] terry wants to remind us that was a different clinton back then. we have a number of guests here with us i would like to mention before we start. and would recognize a number of guests and we have jerry abramson and adrian sans from the white house department of intergovernmental affairs. are they here? we'd like to recognize them. we've worked very closely with them. [ applause ] >> yes, there they are over here. thank you.

we have david o sullivan ambassador to the european union and delegation from the european yoon on. if they're here please stand. would like to recognize them. [ applause ] thank you and welcome. we have dennis stevens embassy from canada and canadian embassy and parliament. we had a nice reception last night hosted by the ambassador there. the canadians if they're here, stand, we'd recognize you. thank you. john bernard deputy minister for international relations in the province of quebec as well as other provinces ontario and alberta. our canadian friends. are they here? [ applause ] we have other guests but we welcome all of you here and appreciate your participation and attendance. let me just make mention too if i could we've had the passing of

an associate justice antonin scalia. some of us had an opportunity to go and pay our respects at his viewing yesterday. at the supreme court building. and certainly a man of great intellect and service to his country, he's legendary and he'll be missed. if you indulge me as we have a moment of silence in the passing of supreme court justice scalia and his funeral today. thank you. we wish the best to his family as we try to replace his position on the supreme court. with that we have just a mention of the rules that we have here. that any governor who wants to submit a new policy or resolution for adoption to this body at this meeting will need a

three-fourths vote to suspend the rules otherwise we have what's been presented to us already for your consideration. and if you have any that would like to submit, submit any proposal in writing to david qualm, the nga staff by 5:00 p.m. tonight. the opportunity to be a chair of this commission an honor to me one of the great privileges i have of being the chair and honored to have the vice chair terry mcauliffe here to help me with this effort, but we have an issue you have a card on your places there called states finding solutions improving lives. it's an initiative that i really believe in. i believe states really are in every shape of the phrase the laboratories of democracy that really are finding solutions

with people's lives that we have in the states and proving and elevate i elevating the condition of americans throughout this great country. so that's been part of my initiative. it's something that's close to my heart. it's something that's close to my head. and, again, i have had this great opportunity to be here for six to seven years now as part of this organization. and i see the good work of so many of you as governors. on both sides of the aisle we are having successes in states as governors in states are leading as these laboratories of democracy and finding solutions. and, again, it's not by coincidence either. it's really by design. it's what our founding fathers wanted us to do and how we wanted us to work together as the united states of america. and i've got on the card here just a couple of examples of why this is important and timely. again, with the challenges we face of america i do harken back

to james madison, the father of our constitution, who talked in terms of the powers given to the federal government are few and defined. and yet the powers he said that we've left to the states are numerous and indefinite. so most of the responsibility for governing a state and finding solutions to people's problems that we have where government should be involved was ideally left to the states to find those solutions. it's the states leading the nation for it. we don't have some of the gridlock with our states that we have exhibited here in washington, d.c. a government mcauliffe said here earlier today, we don't have the luxury of not doing something. we have to in fact find solutions bringing people together, work with our respective populations and our legislators in fact to get things done. and that's why i've chosen states finding solutions improving lives as my

initiatives title. what we're going to be doing is highlighting the successes of the respective states. we will produce a publication. we've invited you all to give us examples of your innovative ways to find solutions to problems. each of you have got them. we have had 83 presented to us already. some of you have not had an opportunity to present your ideas to us to put in the publication. we will have nga staff reach out to you to make sure that you have an opportunity to give us the two or three examples that you'd like to have highlighted in our publication. the restoration of the balance of power is not only timely, it's right and proper to do and frankly i think it's essential if we're to get the outcome in this country that we'd like to have. states really do have the opportunity to lead the way. and i think we have a new beginning, a new opportunity. there's been changes of leadership in the congress.

i think there's an opportunity to rekindle this partnership and make sure we have a collaborative effort and partnershipw10i as we work. and i might add the executive branch current and whoever's going to be in the white house here after this next upcoming election. we all know it is a presidential election year. and rest assured governors will in fact be having discussions with those candidates and engage with them to ask them what they believe the role of the states is going to be in their administration. and what is the role that we can play as states and as governors in helping direct the affairs of the country and the cooperative state-federal relationship which we like to promote and discuss. we'll take an opportunity to have the candidates discuss that with us as an association. i understand the need for partisan politics. again, we are a bipartisan

organization, but a lot of the solutions we have out there really are based on common sense and not ideology. sometimes we have difference of opinion on the process, but we have really similar goals on the outcomes. and, again, i think states and governors have a lot to provide for the folks here in washington, d.c. as we work together to improve the lives of our citizens. so my nga chairs initiative states will showcase these breakthroughs as we go into our iowa summer meetings. so we look forward to that. with that we have a great panel here waiting patiently to participate and give us information regarding the economy. we have an esteemed panel of economists that will speak about the state of the economy that we see. i know that's a concern. you hear it in the news. what is the future of america economically? i know that most of us as governors are always concerned about the economy in our

respective states and what can we do to help improve that economy. it's hard to have a good quality of life if you don't have a growing expanding and stable economy. and as we've come through the great recession and most of us understand and have participated in that experience we know that the challenge that we face in the states and the challenge we face as a nation to have economic opportunity is one of the great challenges we face as governors. so we're going to focus this opening session on the u.s. economy. let me just introduce and joining with us today if you'll raise your hands so people know who you are, mark finley. mark is the general manager of global energy markets and u.s. economics for bp america. he has 30 years of public and private sector experience as an energy economist. we also have gail fosler. gail, former president and trustee of the conference board and president of the gail fosler group. a strategic advisory service for global business leaders and public policymakers.

next we have ethan harris. ethan welcome managing director and co-head of economics for bank of america merrill lynch. there he is responsible for u.s. growth inflation and monetary policy. our fourth speaker is dan white. dan, senior economist for moodies analytics. he coordinates government consulting and regional economic research and an emphasis on fiscal policy. and finally, i'm excited to introduce the moderator for this esteemed panel, global economist joseph lake. joseph who works for the economist magazine's intelligence unit. and joseph is influential voice on the global economy providing insights and analysis on the political, economic and business environments. we are honored to have the entire panel here. please give them a warm nga welcome. [ applause ]

thank you for taking your time to come and enlighten us today. we'll have a presentation, maybe some questions from the governors here. so we'll turn the time to you, joseph. thank you very much. >> thank you. thank you, governor herbert. and thank you all for having us here this morning. it's really a pleasure and honor to be here. i've really enjoyed so far hearing the broad range of accents from all across the country. i'm going to add my irish accent into it now this morning for the next hour or so. this is a great time to be having this discussion. as anyone who's looked at the 401(k) over the past few weeks know it's a very difficult time for stock markets around the world. and so there's a lot of uncertainty at the moment. greater fear than we've seen for some time about the outlook for the u.s. economy. so what we're going to try to do this morning is to parse through some of the noise and give you a better sense of what you can expect from the economy over the next 12 months and even into the longer term.

and hopefully this will help you as you make your decisions as governors about whether to invest more now, to stash more away for a rainy day. and, again, just sort of filter out some of that noise we're hearing over the past while. i'm delighted to have such a distinguished panel of guests here to have this discussion. yogi ber ra said it's difficult to make predictions, especially about the future. but if anyone can do it accurately, it's these guys. we've got a really broad wealth of experience and knowledge here on this panel. so what we're going to do is i'm going to start with five minutes or so about the current shape of the u.s. economy. then we'll turn to the panelists and have a discussion for the next half hour or so. then i'd like towards the end to open up to questions from all of the governors if there's certain topics that are more pertinent to you or if you want a bit more detail about what anyone has spoken on, then please use that opportunity to have that discussion. so to set the scene a little bit and to alie some fears, it's a

bit bizarre at the moment that there is so much speculation that we're headed towards, and i'm going to use this r word quite a lot, a recession. because by a lot of measures the u.s. economy is in stronger shape than it has been for the best part of a decade, and probably in much stronger shape than most of the economy is at the moment. the unemployment rate now is down to 4.9%. that's the lowest it's been in eight years. last year the economy created 2.7 million jobs. and that was on top of the 3 million that were created the year before. the federal finances are in better shape than they have been for quite some time. so are state and local government finances as well. u.s. companies are sitting on big piles of cash at the moment. and u.s. households perhaps the most important part of this discussion are in much better shape than they have been for some time. the average american is much more likely to have a job&óñfju than for the best part of a decade. they're earning more now than they have done. and their household debt

situation is in much better shape. so they've taken this opportunity the last few years to repair their own balance sheets. in fact, the u.s. economy is in such good shape that the federal reserve decided a couple of months ago that it could withstand slightly higher borrowing costs. so for the first time in a decade it raised interest rates. and it's doing that alone among all of the developed nations around the world because at the same time that we're raising interest rates here, the eurozone is cutting them into negative territory. japan is cutting them into negative territory. so the u.s. really stands out as almost a beacon of a strong economy in this turbulent time. now, there's the positivity out of the way. so there are a couple of very good reasons why concerns have risen recently, because the risks to the economic outlook have certainly increased over the past two months. the first of these concerns is the stock market. so the u.s. stock market had its worst start to the year on record. and the first ten trading days

of the year more than $1 trillion of value was wiped off the s&p 500. that is absolutely concerning. and so the question that you want to ask about that is what was the reason for it. is this a sign of a weaker domestic economy here? my answer for you on that is, no, it's not. there are a couple factors behind this. one is fears about the outlook in china, and that sort of swept through global markets. and then the second major factor, and again we'll discuss this a lot over the next hour, was the oil price. and the slump in the oil price. and stocks have been significantly correlated with the oil price over the past couple of months and followed the price downwards. so there's an old joke that the stock market has predicted nine out of the past five recessions. my sense at the moment and i think this is the sense that a lot of people share is that's going to be the case again. it's going to predict a recession that does not happen. because the fact remains that the strength of the domestic economy is still very robust at the moment.

the second reason why concern has risen over the past couple of months over the outlook for the u.s. economy is the state of industry in the country. so i'm thinking particularly here of the manufacturing sector and the energy sector. oil and gas mining. so there's been a significant downward trend over the past year and both of those sectors have shrunk. again, that is particularly important depending on what state you're coming from because i know that those sectors are very important for several of you. but if you're looking at the health of the overall u.s. economy, i'm wondering if they can drag down the rest of the economy, again my answer for you on that is it's highly unlikely. industry accounts for little over 10% of the economy. and a good rule of thumb i always say to everybody is that when you want to know where the u.s. economy is going, look at what consumers are doing, not industry. because consumer spending accounts for 70% of the economy. so if you can get americans to open their checkbooks and open

their wallets and spend some money, there's a good chance that the economy will keep floating along quite nicely. that's what we've seen, consumer spending remains very strong in the face of all this adversity that we're seeing in industry. and there's a couple of good reasons why industries are falling. again, the oil price, and also the strong dollar. we've had a very strong dollar over the past couple of years and that has made u.s. exports less competitive abroad. so there are the two main reasons why there is this increased risk of recession, but i would say -- i would put the risk of recession this year at around 20%. so it's not insignificant, but it's certainly not our central scenario by any manner of means. now, before i turn to the panelists, i think the title of this session was quite negative on something like is the u.s. headed for a recession. so my answer so that is this year, no. but perhaps a better question is when is the next recession coming? because we have not beaten the business cycle. we know one will come, it's just a question of when. now, since the second world war we've had 11 downturns, 11

recessions. and on average the expansions between those those business cycle expansions have lasted five years. we are now in the sixth year of this business cycle expansion. so the reality is that the next recession is probably closer than the last one. so i tell you now that it's unlikely that the u.s. economy will plunge into recession this year, but there's a very good chance, probably better than 50/50 that over the next two, three, four years you will see a recession. and so on that upbeat note, i'm going to turn to the panelists now. we start off with quite a broad overview. i've shared some of my thoughts. and, ethan, can you tell me sort of your general outlook for the u.s. economy at the moment? and what are you confident about? and what keeps you up at night? >> right. so first of all, the u.s. economy is in better shape than the panthers were against denver. [ laughter ] by the way we feel your pain at

b of a, okay. but i think just to build on your comments, i think that the way to think about this is you have a u.s. economy where domestic challenges have faded. we've kind of rebuilt the economy from the crisis. banks have healed. the housing market has healed. households are in better health. and as you point out the labor market's improved. one of the really positive developments is for the first time the recovery you're seeing a little bit of a creep higher in wage growth. that's telling you that the labor market is now approaching full health. so that pickup in wages to me is very positive sign. so all of that kind of domestic backdrop of post crisis healing has really worked well past that. the other thing i think is positive is actually government. the government has both at the state and local level and the federal level we went through

wrenching austerity programs, state and local governments are now in a position to start hiring back a lot of the people that got laid off. and the federal government has gone from brinkmanship moments where we had fiscal cliffs and shutdowns and debt -- threatening to default on the debt, to a much calmer environment in washington. and no new fiscal austerity. so we've kind of -- i view those developments in washington as being kind of an ongoing headwind to growth. things have calmed down now. we're not seeing that kind of pressure on the economy. the problem is as you point out that the domestic backdrops improved dramatically, but the global challenges are there. and what i was saying on that is as you point out the sectors of the economy that are being hurt by global forces is only 15% of the economy. it's the mining and the manufacturing sector. the manufacturing sector is hurt very badly by this surge in the

dollar and the damage to u.s. competitiveness. and mining obviously has a major recession going on due to the collapse of commodity prices. but if you look at government, growing slowly. service sector, not at all affected by global events. very domestically oriented. and then you look at the housing industry. very domestically oriented, doing very well. so 85% of the economy is growing at an okay pace. and then we have these deeply troubled sectors. i think what worries me going forward is what we're seeing in the global environment now is not recession or shock, if we were to actually see a collapse in the chinese economy that everyone talks about, which by the way has not happened. china's still growing, it's just slowing down. if china were to collapse, or if we were to have a big crisis in europe, or if we were to have a complete reversal of the current oil situation, a crisis in the

middle east and oil goes through the roof, now we're in the kind of environment where really, you know, worries about recession are there. but finally, to answer your final question about preparing for recession. i agree with you the odds of recession in the next year are low, maybe 25%. but over the next three years, you know, maybe 50/50. and i think that we need to acknowledge that, you know, give us a few more years and we may no longer be in this low inflation slow fed mode. we may start to be in an environment where the fed gets tough. and certainly we're not going to be a $30 oil forever. so we'll no longer be in such a benign low oil environment. i know folks from oil states it feels very painful, but the net effect on the u.s. economy's actually pretty good of low oil prices. so, yes, i mean, i do think that if you have kind of a longer

horizon, you know, we need to acknowledge that recession's a real possibility. >> gail, there's been far too much agreement so far. tell us something that you disagree with. >> well, let me just take a little bit of a different tact. and it may be dangerous for me to venture into the world of football analogies that we've plumed, but we've seen a lot of defensive games, you know, during the not only the super bowl but leading up to the super bowl. and in my view the u.s. economy has been playing a defensive game ever since the crisis. you know, i have been -- earned a reputation of being an optimist, but we've never gotten the cyclical engagement of this economy that we have during past cycles. we've kind of run up to it. sometimes it has been, you know, political events.

i spent 11 years working for pete in the senate committee way back in the '80s. i never thought that our national policy would be the enemy of the economy and yet we saw that in the early fazes. but we have also -- what we have done in terms of financial regulation is that we have created such high capital requirements and also the threat of litigation that our banks are simply not lending at the rates that they have in any other post world war ii recovery. so whether you look at the u.s. domestically, or you look globally, the level of credit growth is lower by far than it's been in any post world war ii expansion. so when you don't have credit, some of the key trade sectors like investment and durable goods and things like that do not benefit from that additional stimulus.

i mean, a credit is sort of the healthy stimulus that comes to the economy from economic opportunities that are pulled forward into the present. and they're not all certain, by the way. it's called risk. some things don't work out. but by expanding on those opportunities you end up with an uplift, not just in your domestic economy, not just in investment, but in global trade. and as a consequence we have had a lower rate of growth in global trade during the cycle than we've had again in the post world war ii cycle. so i think your views reflected you talked to all of us. and i think your views were a very good synthesis of where we are because, you know, we exchanged these views. and, no, i don't think any of us see this year as being a recession. but i actually would put a 100% certainty on a recession by

2018. i think it is something i have a private business -- actually, i do some real things on the side. i just don't do economics. and we have a recession in our three-year plan for 2018. and the reason that i say this is because it's not just the average length of an economic cycle, but one of the lessons of the crisis is that the financial -- the wealth -- the stock of wealth is so large, and the financial system is so important that we can have financial shocks that create recessions, even when all these good things that we're talking about in terms of the consumer and the kind of day-to-day data on the economy look good. >> that's where you expect the recession to come? >> so my concern is that we are going to get another financial shock between now and certainly by 2018. and the governors here should be planning on that in terms of

their not only their fiscal plans but their plans in terms of these new initiatives for how they deliver greater security to their populations during what could be a very rocky ride. >> yeah. and on a slightly different topic than mark, i want to bring you in here on probably the biggest story no matter what country you've been in over the past couple of years when it comes to the economy has been the oil price. because no matter where you are it has a huge impact on you, whether it means it costs you less to fill up your tank with gas or perhaps some of the governors here know your state finances are falling because of the energy sector is doing so weakly at the moment. so, mark, can you tell us what's the oil price going to be in the next -- i know you're just back from saudi arabia this week. and there was a landmark deal announced that perhaps doesn't seem to have a lot of substance behind it. so what's your outlook for the

global oil price over the next couple of years? >> thank you, joey. i'd like to first start by thanking governor herbert and the staff here at nga for a chance to join the panel and i'd like to thank all the governors and their staffs for service. so thanks to you. of course if i could predict the price of oil i wouldn't be here, i'd be on a beach somewhere. but i would like to share our perspectives both on the oil market and its prospects but also on the implications of that for the u.s. economy. i'm going to focus specifically on the short-term outlook, but i did include a copy of a just-released long-term world energy outlook including a summary data for the united states looking out over the next 20 years. something for your swag bag when you leave. and happy to speak about longer term dimensions of the u.s. energy situation as well. for the oil price today i think it's important to recognize where we've come from. the reason why oil prices have collapsed is that we saw

all-time record growth of production outside of opec in 2014, for example, the u.s. had not only the biggest increase of domestic oil production in the country's history, it was also the third biggest increase of oil production of any country ever in the history of the planet. so you had a huge increase in oil production in outside of opec. and it was mostly driven by the united states in the last few years. faced with this long-lived supply shock, i think opec members made a reasonable decision to say the only thing we can do in the face of this is to defend our market share. and when they made that decision in november of 2014, oil prices collapsed. since then the market has evolved in a way that any economist would tell you to expect in the face of severely lower prices we saw world oil demand last year grow by double the historical average. we saw production growth here in the united states and elsewhere outside of opec slow

dramatically. however, in 2015 we also saw a very large increase in production in opec including in iraq but also saudi arabia. and the result of that has been that this situation of an oversupplied market has persisted into well where we are today. where we sit today is that there's still around the world too much supply and not enough demand. now we also face the prospect of increased production coming out of iran as sanctions are lifted. in the face of too much supply and not enough demand we've seen oil inventories around the world overflow. in fact, inventories of oil and refined products like gasoline and diesel fuel here in the united states are at all-time record levels. and they continue to grow. now, on our data, we do believe that global demand will finally begin to catch up with supply in the later half of this year. and that should while we think that there might be some risks still to the downside for oil

prices in the very short-term, that should provide some support, you know, in the back half of this year. but that doesn't mean that the situation is rebalanced because remember inventories have been growing. and you need to really work off all of that surplus inventory before the market will truly feel rebalanced. and that's where we've come from. you may have heard our ceo bob dudley say all along we think the price of oil will be lower for longer but not forever. now the question -- next question is what it means for the economy. and on net there's a leading up with questions about whether there would be a recession or not, many of the governors in energy producing states know there's already a recession in the energy sector. on net, however, the u.s. is still the second biggest net importer of oil in the world after china. that is to say the u.s. consumes more than it produces even after the shale revolution.

so on net lower oil prices should be good for the u.s. economy. but i think that there's some interesting wrinkles to that right now. and i'd be interested frankly in our conversation with the other panelists and the governors to explore this further. if certainly seems to be the case that u.s. consumers have not been spending this windfall. and you made some mention of that and ethan as well. so one of the questions is why are consumers not spending this windfall, and will they begin to or not? i think it's also been clear that there's been an absolute collapse in spending investment in jobs in the energy sector. so that's had an outside impact of the economies of the energy producing states. there's a couple of other wrinkles that i'd like to plant before consideration in the room. one is that the shale revolution means that energy doesn't fall along the old lines that we would have thought. it's redefined where the energy producing states are.

and so for example in states like ohio or pennsylvania, the decline in prices is having a bigger impact than you would have historically seen. the other bit of it is that the supply chain for the energy industry is nationwide. and bp produces an annual economic impact report. and we show in that report that for bp at least a significant share of our spending is not in the traditional energy producing states. so, yes, the majority of our spend are in places like alaska and texas and louisiana. but we also spent in 2014 $600 million in california. $300 million in new york. so it's just an illustration of the fact that the reverberations of the energy shock truly are felt nationwide because of the national dimension of our supply chain. >> right. so that fallout is actually nationwide. i'm going to come back to the topic of oil in a moment, but dan, i'd like to bring you in

here now. you've done a lot of work with a lot of the states that are present here today. and as you've just heard we're facing up to what sounds quite likely a recession over the next few years. and further headwinds from the oil price over the next few months. can you give us an idea of what happens to a state's finances when it's about to fall into recession? and maybe just walk us through a little bit what you saw happening back in '08 and '09. >> sure, joey. first, thank you again for having me. i want to -- i moved from the public sector to the private sector almost a decade ago. and one of the things i've learned in the private sector is that you always have to make the lawyers happy. so i have to have a little disclaimer before i start to speak. i work for moody's analytics, don't let anything i say today be misconstrued as having any ratings bearings whatsoever. on a more personal note, please don't come up afterwards and ask why i downgraded your state. i had nothing to do with it. i swear to god. i can get you in touch with the guys who did, but that's about

as much help i can be unfortunately. the other thing, joey, i feel a little uncomfortable up here because we've got five economists and we all agree. and that makes me very uncomfortable that five economists can all agree. >> starting to question myself now, yes. >> but you're absolutely right. we have about the same probability of recession this year roughly about 20, 25%. but virtually 100% certainty over the next three years mostly because we're six years into the business cycle. and that's one of the longest periods since world war ii we've had of an expansion. so we've been working with a lot of our clients. we've been working with a lot of folks to make sure that states are prepared for the next recession, whatever that may be. one of the main reasons being is that when states do matters a lot for the economy. i know i'm preaching to the choir but you have a lot of power whether you know it or not. one of the reasons being we've decided to stress test state

governments as a matter of practice in order for developing how sensitive state governments really are changed in the overall economy. two years ago we did a research paper stress testing state governments in part because we were tired of our friends in the banking sector having all the fun and getting to play with all the cool models. but mostly because when we looked back at what happened during the great recession, we found that what states and local governments did had dramatic ripple effects throughout the recovery. it's one of the reasons why the great recession was followed by the not so great recovery, if you will. if you look at the total number of jobs that were regained after the great recession, you can see that we regained pre-recession peaks roughly two summers ago, maybe a year and a half ago. but if you look at the types of jobs that we've regained, you see the jobs we've regained are not the jobs that we've lost. so if you look at high wage jobs, we're much further ahead of our pre-recession peak than we were in terms of the total. if you think of low wage jobs, we're much further ahead of our

pre-recession peak. but if you look at mid wage jobs, we're still about 800,000 jobs shy of where we were before the recession. of that 800,000 jobs roughly 400,000 of those are from states and local governments. majority of those are from local governments because those local governments have had a much more difficult time over the last four years than states have. nonetheless what we found was that states in general, and i'm going to speak in gross generalities here because i know you all represent one of your states, in general states were not well prepared for a recession going into 2008 of any size, let alone the size of what happened. we have our own internal models for every state, we have our own state tax models. i see a number of familiar faces who we do tax forecasting for. and we aggregated them all together. and we went through one of our alternative economic scenarios. we replicate eight different

economic scenarios every month for all the states in metro areas in the united states. so we went through a moderate recession scenario and said what would state government finances look like if we went into a moderate recession this year? and what we found was some interesting things. the first thing we found was that the spending impacts are just as important to keep an eye on as the revenue impacts for recession. so if you go back to 2008 and you look at the timing on when a lot of the stresses were put on state budgets, they were put on state budgets first from medicaid programs. so look at the spike in medicaid spending happened almost a full year before the first dips in revenue came. so a lot of the first cuts and tax increases that states implemented were to deal with higher medicaid cost because of the cyclicality in the economy than the revenue effects. the second thing that we saw was that state budgets in general are much more sensitive to changes in the business cycle

today than they were 15, 20, even 30 years ago. a lot of that is because medicaid makes up a much larger piece of overall state budgets in general. and that can have a lot of fluctuation going into and out of a recession. the second thing that we saw is state tax revenues are actually much more sensitive to changes in the business cycle than they have been in the past. if you look at state tax revenues from 2001 to 2010, they were three times as volatile as the underlying economy. in other words the year-to-year percent change had a higher standard deviation in tax revenue than it did in nominal gdp growth. which means that in a decade it's bookended by recessions we're going to see much larger fluctuations in tax revenue over time. now, if you're a state like alaska or north dakota or an energy state, you're used to this. you're used to seeing large p k fluctuations in your tax revenue. if you're a state like california or new york, i'll pick on them because i know their governors aren't here. you're going to see probably

similar fluctuations today versus what you saw 20 years ago. the reason for that is personal income taxes make up a much larger piece of overall state tax revenues than they have in the past. those are a very volatile revenue source. we have seen in general states move to more progressive systems over the last 15, 20 years. now, that makes sense from an equity standpoint, but what it does is it makes states much more reliant on a very small number of taxpayers at the very high end of the tax bracket for revenue. while that may make sense from equity, it also makes much more volatile. we've seen states like california and new york very reliant on very aggressive personal income tax systems need to start budgeting more like your oklahomas and your alaskas and texas because they're going to see much more sensitivity to changes in the business cycle going forward. >> i want to just interrupt you slightly there and ask a quick follow-up question. so you've made some very interesting points there when

you enter a downturn the first thing that happens to states is spending starts to rise and a year later on average income starts to fall, revenue starts to fall. and you said states were not prepared back in '07, '08 for this great recession. are they prepared now for the next one? >> that's a great question, joe. one of the things we did for the stress testing is we wanted to see whether they were ready. and what we found was in order for the average state keeping in mind that there's no such thing as an average state, should have about 8.5% of general fund expenditures put away in some type of rainy day reserve fund to last through a year -- one fiscal year of recessionary effects. if you don't want to -- excuse me, if you don't want to increase or cut taxes for a year the average state should have about 8.5% put away. >> and do they? >> well, i think the governor -- most states do not. looking at the latest data i want to say the average state has around 4.5 to 5% put away. >> so now is the time to

start -- >> absolutely. if most states at least states we work with are already working towards preparing for the next recession. governor herbert's state in particular has actually put its state through a comprehensive stress test. i think it was one of the first. and we as economists home that more states follow your example, governor, because what it does is it really helps them focus on their individual states sensitivity to changes in the cycle. and more importantly it helps them to create very purposeful reserves. there were some states in the great recession had reserves but didn't use them because they weren't sure what the purpose of that reserve fund was for. >> great. i want to talk more about policy here. gail, you and i had a conversation earlier this week about what the states could be doing better now to try and help to not prevent the next downturn but to make it easier. what can you be doing now in the good times? what can you be doing in terms of job programs to try and

improve the lot of the average american at the moment when times are good and we have this opportunity? >> well, i think i was very excited to hear you refer to this sharing of the states' successes. these states, these laboratories of innovation because the ability to, for example, address the unemployment system which in many states is still extremely archaic. and yet there are states that have seen their unemployment insurance systems which are basically to deal with people who are unemployed actually become much more proactive in terms of developing programs to make them key employment services. there are other states -- our business is in california where there is a work share program. it's a manufacturing business. and that work share program has been incredibly important to us because we've been in as you see in the data we've been in this

manufacturing recession and it helps us. we've had to go to a four-day week, the work share program helps us -- helps our employees be able to cushion the income effects of this slowdown. and it helps us not have to cut back in terms of total employment. so the idea that the governors could then begin to look at a recession, you know, a recession model that would be programs might not work in every single state, but would be programs that would help cushion these effects. and, you know, in terms of this purpose i was fascinated by what you had to say, dan. >> thank you. >> we can learn here too on the panel. but having these purposeful rainy day funds then that can kick in and fund some of this specialized improvement in terms of the efficiency, the training and the inner section between

government education in terms of universities and apprenticeship programs and the private sector. because even in this day and age when we are linking almost everything, these are almost -- there are almost motes around every single one of these sectors. we're not maximizing our opportunity to work together. >> yeah. ethan, i see you nodding your head there in agreement. any thoughts to add to that? how are you feeling about the labor market at the moment and can we do more to help it? >> what she said is absolutely right so i'm not going to waste people's time with that. i think that the other thing here is, and i'm sure everyone in this room would agree, i mean, you know, we need to invest in infrastructure in the united states. and that obviously the federal government has to play a big role in it. anything we can do to kind of work in that direction because that is in ways the rainy day fund for the long term. the rainday fun is to deal with

recession, the infrastructure is something we've neglected as a country and that bites you over the longer term. that would be the only thing i would add. >> joey, can i jump in? when we look at the employment situation, we always look at total employment whether it's going up or down. but there is this thing called job creation, job destruction. so what happens during a recession is job destruction rises and job creation slows. but what really happens is job destruction rises and these are millions and millions of jobs, but there are still job openings. and even today, you know, if you look at the national federation of independent business, there are -- they're reporting something like 3 million job openings. i mean, a substantial number of job openings that are not being filled today. and so finding ways to make this employment system much more efficient so that the inventory of unfilled jobs is always at a very low level because we have more people that are cycling through this employment system. and i think this is going to

happen at the state levels. it's not going to happen at the federal level. >> i would add one thing to reinforce what you're saying. when i talk to clients, when i talk to middle size businesses that we give services to as a big bank, it's amazing the consistent message you get from so many medium sized businesses is that we can't fill jobs because we don't have the right trained people. and a lot of it has to do with -- i got a liberal arts degree, and went onto get my ph.d. but i don't think that's for everyone. and we need to think more about more technical training that's actually aimed at the jobs that are out there. because it's uniform across businesses. >> that is a really good point, joe. one of the things we're seeing in the housing market we've been -- we've actually had to reduce our forecast for home building over the next couple of years because in large part even though the demand is there in the housing market, there are not enough plumbers, there are not enough roofers, not enough skilled tradesmen to physically

put these houses up fast enough. >> a short fall there. mark, you look like you've got something important to say. >> i think there's an important point about the investment climate as well. as we look around the world, we find for example that shale resources are ubiquitous. and yet it only happened here. it's obviously not driven by what's below the ground. it's what's above the ground that matters. is there an investment climate that permits, you know, capital to flow to that investment opportunity? is there a system that encourages innovation and competition? and i think that, you know, again we see the example in a number of these states about policies that promote investment and innovation. i think that's an important part of this dynamic going forward as well. >> that's a really good point because i think the shale revolution could have happened in a number of countries and it was here that it really kicked off. i want to just follow-up on a quick question there because the energy sector is the one that's been hardest hurt over the past while and we've lost over

100,000 jobs in the past little bit over a year in oil and gas. what's your outlook for u.s. shale in the next year or so? because it's actually been surprisingly robust. production has kept up quite strong over the past year when a lot of people thought it would fall off when oil went down to 40 then down to 30. what do you think is going to happen over the next while? >> the story here is that we have seen a sharp fall in investment and in physical activity. i mentioned earlier with u.s. rig count since it peaked in late 2014 has now fallen by 75%. you know, the total u.s. rig count for oil and gas is the lowest it's been since 1999. and yet the decline in u.s. -- u.s. natural gas production so far has continued to grow. and the decline in u.s. oil production has been relatively modest. and the key factor behind that has been amazing increases in the productivity of each well that has been drilled. >> right. >> so going forward i think

there are two key moving parts, how many wells will get drilled and what will happen to the productivity of each of those new wells. and so in our reference case we've got production in the united states declining this year. but again, as oil prices stabilize and begin to recover, which i mentioned earlier is our reference case, as investment activity begins to return we think that there's significant upside potential. and in fact over the longer term of the outlook that i spell out in the document that we've left with you all, we believe that u.s. production of oil and natural gas both can double over the next 15 to 20 years. >> so the longer term horizon is actually quite a positive story. i want to open up to questions from the governors. we've got about ten minutes left. but just before i do that can each of you give a little 30-second answer to this one? because we have a tendency to get focused on the short-term and what's happening now and what's happened over the past three or six months. if we were sitting here five

years from now, what would we be talking about then that we're not talking about now? what's the next thing that we should be aware of? what's the next big factor that could shape the u.s. economy? anyone who has the first answer can go for it on that one. >> i mean, to me the medium term story for the u.s. and in fact the whole developed world is demographics, right? i mean, that's the little kind of very slow developing time bomb. so we've got to get used to the idea that we're going to be in an economy with very low growth in the labor force and therefore very low growth in tax base with the building budget pressures, which everyone in this room knows about. and so there's no avoiding the challenges of retirement and slow tax base growth. and that to me that's something we know for sure because we can just look at the statistics. >> right. and in five years time that's going to become a very pressing concern. >> i think, i mean, i'm 59.

i was born in 1956. i know i look a lot younger than that. but i'm the peak year of the baby boom. and i'll be 65 in six years. and hopefully retiring, maybe not. but the demographic pressure's going to get very high at that point. >> right. five years from now. >> five years from now, maybe not even five years from now -- >> will you be retired five years from now? >> i'm never retiring. and we're not going to talk about age so -- >> okay. >> enough of you. is china. >> china. >> i think the view there's been all of this hand wringing about china being weak and, you know, collapsing and all of this. i think it's absolutely wrong. china is strong. it's dynamic. i don't quite agree demographics is destiny. you know, we're 8% of the global population. and we still have the biggest

market in the world. but china is becoming economically aggressive. we've seen already these big acquisitions that are now under regulatory review. that is just the tip of the iceberg. china is going to be globally competitive not just in low end manufacturing but in major sectors in innovation. and i think unless we get ourselves together and think about investment and innovation and economic advance, we're going to find ourselves completely on our heels with respect to a china challenge. >> so china. yes, please, mark. >> the reality is energy is one of the big building blocks in the u.s. and world economy. so i think that five years from now we'll still be talking about energy and the challenges will be can we continue to find sets of policies that make energy, you know, an essential building block to the economy that is secure, affordable and

sustainable. >> all right. i'll try and be extra quick, dan. i think fiscal policy. u.s. fiscal policy, the cbo's new projections have the federal budget about 80% of it will be on autopilot by 2025, 2026, our internal projections for states and local governments combined are that that will be about 40% of state and local government budgets by 2025. and we include in our forecast we have very high hopes for tax reform and mostly entitlement reform is something that absolutely has to happen. because as every governor in this room can tell you, medicaid will be a larger portion of their budget next year than it was the year before and it's going to continue out into perpetuity unless that program can be reformed going forward. >> great. so quite a broad range of answers there. we've got about five minutes or so, so i'd like to take the opportunity for any of you governors who have anything that you want to ask our panelists. so if you have any pressing questions, if you want to i

think switch your microphone on and just introduce yourself quickly. >> hello. i'm from colorado. and not an economist. as a matter of fact i don't think i've ever taken an economics class i'm embarrassed to say. but is there some point you look at the prediction we're going to have a recession primarily, almost each of you said, because we haven't had one in such a long period of time. and yet part of this fourth industrial revolution of smartphones and technology is allowing inventories to be razor thin. in other words just in time has become a practical reality. doesn't that -- i mean, the little i've picked up over the years on economic duration has always sort of talked about this cycle of building up inventory to too great an extent and then consumer purchasing goes down a little bit and all of a sudden you're left with this inventory and businesses have to cut back and lay people off.

doesn't the just in time revolution somewhat diminish the probabilities of a recession? >> so i want to create some real controversy within the panel here. i don't think there's a 100% chance of recession in the next three years. i think that as -- i think you're right in pointing out that the u.s. business cycle absent a major financial shock like we had in 2008, 2009, is more stable because of inventory management. i think it is more stable. i also think -- i don't think that we're on a clock here. recessions happen when you have big imbalances in the economy. they happen when you allow -- the fed allows inflation to get out of control and they have to slam on the brakes to stop it. it happens when you have a massive spike in oil prices. it happens if you have a big bubble in some part of the economy. so i don't see -- in those three respects i just don't see the preconditions in place right now. but, you know, give us a few

years, you know. and then you start to really worry about it. so i don't think that -- i think the reason the rainy day fund thing is so important is because we all know how painful it is to build a rainy day fund so you start early. >> but, joey, let me defend my 100% if i will. because what we saw in the crisis was a very new phenomenon. and that is that the underlying economy, i mean, you know, for those of you who know corporations, i was on corporate boards, the underlying economy was doing really quite well going into 2006 and '07. the housing had tailed off but incomes looked good and the like. but when you get a financial event where markets do not trade -- we had a whole strata of securities in the financial markets that did not trade. and so it was essentially money destruction. it was financial destruction. and so what happened was that it was a virus that migrated from

the financial sector into the business sector such that these inventories, which were already low and lean. you had to translate working capital into cash. and this went on through the entire economy. and so we saw a little -- you know, if we've made banks so strong through financial regulation, why was it when we see the financial markets collapse that suddenly this goes right back to the banks we see european banks on the ropes because people are afraid that they can't make their dividend payments. i mean, this is -- so our work, and we've done this, we have something we call a zone of risk in our analytics. and it really relates to where we see instability to begin to build between the rate of growth and wealth and the rate of growth in the underlying economy. and we are in that zone now. but that's the transmission device. it is not from the economy. we've done away with these -- a

lot of the cyclical instability, but we have created a lot of financial -- potential financial instability because we don't understand the financial system. >> okay. i think we have time for one more question. we have time for more question. >> asa hutchinson from arkansas. i was struck by i think it was mr. white that was making comments about signs of a recession first would be in the -- on the spending side from government and particularly medicaid. then you would see a revenue impact. i want to focus on the medicaid side. i assume that's because the consumer might lose a job, might be enrolled in medicaid so we monitor the number more than the growth and and rate of growth in medicaid spending. i want to focus on whether that's the right indicator is the number of people participating per the rate of growth. right now the rate of growth is

very minimal. at least in arkansas we've been very blessed in that regard on medicaid spending. but also i mean other than having a great rainy day fund, there's not a good way to control it under our present system of minimal flexibility for the states. would you elaborate a little bit more on what a governor should be looking for in terms of medicaid spending and how we should react to that as an early warning sign? >> absolutely, mr. governor. you are absolutely right in that it does depend more on the enrollment numbers than it does in the overyawl speall spending if you include the federal funding in there, spending per enrollee is growing much faster than revenues are coming in. so that number can also fluctuate based on how much federal help you are getting versus how much the state is putting in. it is really the enrollment number to keep an eye on. that can be very tricky to do right now because a number of states are in the form of expanding their medicate program. a lot of folks are coming on to

medicaid for non-economic reasons. we expect beyond 2017 as those programs sort of run their course enrollment will once again be a better indicator of where a state's economy is headed. another great place to look is the unemployment insurance claims because i know states have a lot of spending there. one of the reasons we don't use ui in our stress testing models, because it is relatively small compared to the overall medic d medicaid. the other thing that states can be looking at is in terms of medicaid, i know that you're going to be going across the street tomorrow evening and monday. medicaid is unique among some of the state's structural issues like pensions and rainy day funds in that it is not something that states are equipped to do a lot with on their own under the auspices of the affordable care act. it is something that states need a lot of help from the federal government in order to bring overall spending back into line. one of the reasons that it

scares us in terms of the -- or economists is if you look at the -- even if you look at cms numbers which come from the department of health & human services, they project that state spending on medicaid over the next ten years or so is going to average above 6%, 7% per annum. if you look at long-term 30-year window for state tax revenues, they average somewhere 5.1%. life's tough in a world of constrained resources, and when you have a year where medicaid spending is 7% and tax revenues are 5%, that 2% has to be supplanted from somewhere else in the government. that's why we support state and location government spending on mandatory pensions spending interest to grow significantly between now and 20 25. >> i'm afraid that's all the time we have this morning. i'll hand it back to governor herbert now. please join me in thanking our panelists for such a great discussion.

>> we do thank you. i'm going to take the prerogative of the chair because i have one question. that's the question that was mentioned about the entitlements. we'll be talking about that in the next five years. i know that the concern the governors have, we have different perspectives on this, but the national debt. what that's going to cause to happen to the economy, to our ability to function and provide the services that we, the people, think should be appropriate from the government. so could you just take a couple minutes and i'm interested in your opinion on the $19 trillion national debt and unfunded liabilities that makes it trillions of dollars even more than that. >> i can have are the first shot at this. so in terms of the short-term picture looks quite good at the moment. the federal fiscal deficit has fallen for five years in a row, down from around 10% at the peak of the crisis, down to under 3%

this year. that's the fastest fall in the fiscal deficit since the world war. that was really incredible retrenchment of what we saw in the post-crisis response. the longer term picture is quite different. because as you entitlements is going to kick in in the next year. you mentioned demographics. i'll pass it off to you for the longer term. >> i don't think in the next five years it is going to be an issue. the government has zero problem funding itself on the markets so the debt doesn't act as a real constraint on the ability of government to function. it's a slow -- it is, frankly, a slow-moving train wreck because for the same reason we talked about. there's too many things on automatic pilot here. and the problem i think politically here is that there isn't -- there's no painless solution to this. if you're going to -- for example, you're going to control

medical spending, you have to do 1 of 2 things. you either have to create more out-of-pocket exspenlss f expen for patient so they have an incentive to self-ration or you have to ration through quantity controls through the amount of service you give people. but there's no magical cure here that doesn't involve forcing some painful decisions. again, in the next five years -- i'm in wall street. i have like a three-day horizon in my view. but no, have you a two-year horizon. no big deal in the short term but we'll -- and it is the health care side. much more than the social security side. >> what would rising interest rates mean for interest rate payments on the debt? >> i think the congressional budget office estimates of the additional funding issues around higher rates make perfect sense. there's a gradual pressure on

the budget from higher interest rates. the problem is not that. the problem is what if you get in an environment where funding -- where people look at the deficit and they see that there is no end in side to the increase. then you start having to pay premiums on your budget. it is like having a debt downgrade. now you're in a debt crisis cycle which the good news for the u.s. is we have a lot of rope to hang ourselves with because we are the center of global capital markets, and so markets will fund us if we're much more irresponsible than other countries. bad news is that we have a lot of rope to hang ourselves with. >> i would just, as a final comment then, i would say that the short -term outlook for the u.s. deficit and debt is looking fine. we need to start getting worried about ethan retires. >> within the next five years, there's not anything that's majorly going to affect the economy. but the longer we wait to fix

these problems the more difficult they're going to be to fix. they're already really, really difficult to fix. that's why they haven't been fixed yet. if they were easy, they would have been fixed years ago. >> it's not -- the debt is sort of the final station on what is a downward spiral in terms of the train heading to that point. so all of these decisions -- when dan talks about medicaid increases, i see education cuts. i mean these -- when we talk about all the entitlements, i see the inability and we finally passed a highway bill but basically we used to have most of our federal spending was infrastructure. now almost none of our federal spending is infrastructure. the extent to which you degrade the economic ability of the country to support a vital governmental system because you

have all of these problems that just keep building up and taking over the available resources to me is much more serious than the down-the-road debt problems because it's too late, as greece shows us, it's too late to solve that problem when you're at that point. >> well, thank you. you demonstrate the complexities of the economy. i'm sure we could spend another hour here and be fascinated with your opinions. we appreciate your courage in coming to try to give us an economic forecast of some sft areas that we ought to be concerned about. states really are ground zero whether it comes to economic development. it's something that's on top of mind for every governor and every state in all of our territories, what can we do to improve economic conditions and provide quality jobs for those that we serve. so we thank you. i know it is a tough job predict being the economy. it is probably somewhere between palm reading and astrology when it comes to the accuracy of forecasts. but we appreciate you being

here. to ethan, gail, mark and dan, and joseph, our moderator, let's give them a round of applause, once again. we're going to take two minutes. governor branstadt is here with us. we recognize you for your tenure in iowa for 22 years. we know you'll be the host for our summer meetings in iowa. if you'll take a couple minutes and tell us about that. >> governor herbert, thank you very much. we are excited to host the national governor's meeti ining des moines, iowa, july 14 through the 17. we want this to be a real family-friendly event so we encourage you to bring your children and grandchildren. i've done that with my family for the last three governor's conferences and they've all really enjoyed it. my whole family is involved in planning this and we want to make it a really successful

event. we're going to have the governor's council meet at camp dodge, home of the iowa national guard. we're really proud of that. we'll have events at the state capitol at the world food prize hall of laureates and at the iowa state fairgrounds. so this should be a lot of fun. you can get a little taste of iowa out here in the hallway. we have got blue bunny ice cream and jolly time popcorn. we're famous for great food and very friendly people and we want -- also, it is a lot cheaper than going to the greenbriar. [ last laughter ] >> we had a great time at the greenbriar. but iowa is a very economical place to bring your whole family, so we encourage you all

to come. thank you very much. >> thank you. [ applause ] >> friendly competition between west virginia and iowa. we can all kind of play "let's make believe" and act like we're all running for president by going to iowa, too. so we'll look forward to being there, terry. as we close here, let me -- it is time to recognize some companies. one of the great things about the national governors association is our center for best practices. probably as we come together and we share what's working in our states and the best practices we learn from each other, from our successes we learn where things aren't maybe going as well and learn from that, too. the ability for us to share those best practices really is a focal point of the national governors association. our nga corporate fellows is a group of corporate entities that help us fund that as a non-profit organization to make sure that we can share those ideas and practices and give governors throughout the country the opportunity to learn and to

incor incor -- incorporate. these fellows have been here for many years to help us with this funding. 125 participating companies provide very critical and crucial financial support to our nga center of best practices. it is really one of the best in america that's functioning right now. we appreciate the good work of our staff and those that participate as governors on that organization. so right now i'd like, if we could, to recognize several of our corporate sponsors who have reached major milestones in their support of this organization. so please join me in thanking these following companies as i read their names, we'll invite them to come up here and we'll give a little token of our appreciation here and we're pause for a photo, they've told me here. first we'd like to have brian ruzza from general motors. they have been a sustaining member for 25 consecutive years.

please give them a round of applause. >> next we have michelle kahn from kiss so cisco systems. they've been a sustaining members for 20 years.cisco syst. they've been a sustaining members for 20 years. now we have korea aku of santa fe. been 20 years a sustained member.

give us a round of applause again thanking them for their sustaining membership. others who are here, we thank them all. long-standing support of our nga center for best practices. that concludes our opening session. we have a governors-only meeting we'd like you to hurry to. it will start in the next 15 minutes. we'll stand adjourned and mo of to our governors-only meeting for lunch. thank you.